An alien visitor, carrying only the Ontario Securities Act as a guide to humankind, would be hard pressed to know what kind of creatures we are. He would assume that we are all capable of reading and understanding complex financial statements and dozens, if not hundreds, of pages of dense legalistic prose. And he would assume that we can stake our life savings on our interpretations. Yet, unless we are already wealthy, we cannot be trusted to invest even the price of a Playstation 3 in a new venture without the advice and assistance of a high-school graduate who has taken a correspondence course in financial matters.

The alien would assume humans are vigilant, litigious and have deep pockets. By leaping on big lies and launching civil actions when our stocks lose value, we play a key role in keeping big corporations honest about their finances. We are also dominated by our stockbrokers, who must determine whether each investment is suitable. However, if things go wrong with our investments, we are in court again, suing for negligence or worse.

Our visitor would eventually discover a profound disconnect between the hypothetical investor enshrined in securities regulation and the humans for whose protection the rules and policies administered by the Canadian Securities Administrators, the Investment Dealers Association of Canada, the Mutual Fund Dealers Association of Canada and Market Regulations Services Inc. exist.

Canadian regulators and legislators have long relied on fear of private civil actions launched by individual investors to force conduct standards on issuers. This reached its apotheosis in the British Columbia reform proposals now enshrined in the 2004 B.C. Securities Act, which has been deferred indefinitely. They looked to investors’ civil actions to flesh out general codes of conduct for both intermediaries and issuers, and this concept still lurks behind the notion of “principles-based” regulation. The use of hypothetical investor suits as a deterrent to bad behaviour has led to a widely held misconception that civil remedies are a realistic means for individual investors to obtain compensation for losses.

In fact, civil litigation against either a registrant or an issuer is arduous and expensive. And alternative dispute resolution also has upper limits on recovery and can be expensive. Potentially actionable complaints against an issuer or intermediary — dealer or investment counsel — are generally triggered by a loss the investor finds surprising and shocking. In addition, loss quantification can be complex and require expert analysis.

Small start-up issuers that fail seldom have the resources to cover an investor’s market losses even if they can be attributed only to misleading public disclosure. With larger issuers, the need to show causation and due diligence — along with business judgment defences — limit the opportunity for recovery, as well as add technical complexity and, therefore, cost to the legal and economic arguments that must prevail in court.

A dealer’s client may act like the proverbial deer in the headlights, expecting the firm to fix the losses, only to discover too late in the process that courts view this as a failure to mitigate. The investor’s own records may be in disarray or non-existent. And it is usually a surprise to clients who signed their initials in boxes on a client account agreement that those initials can be evidence that they accepted the risk of the loss of their entire savings. Even with clear causation and complete contemporaneous documentation of conversations and instructions regarding an account, the investor as plaintiff must bear the financial and psychological burden of moving the action forward, often for years, with no guarantee of a win at the end and delays and inaction favouring the defendant.

Successful class actions against issuers for losses attributable to a misrepresentation in a prospectus or in secondary market disclosure are rare in Canada. These suits primarily benefit class-action counsel. In Ontario, caps on recovery under the former Bill 198 (now Part XXIII.1 of the Ontario Securities Act) for secondary market misrepresentations make contingency fees unattractive and are driving counsel to explore strained interpretations of the corporate law oppression remedy.

Canadian issuers would usually rather fight than settle, unless the CSA is on the other side of the table. When the cost of years of civil litigation is deducted from the losses attributable to wrongful conduct, most small class-action investors can, at best, expect a modest recovery — assuming the issuer is still solvent.

@page_break@Rogues and opportunists have been drawn to flows of wealth since the dawn of commerce. Access to that big betting shop known as the global capital markets doesn’t come cheaply, there are few guarantees and what you get isn’t necessarily what you paid for. Earnest civil servants, draconian penalties, form-filling and fear of litigation will never really change this. Before looking to the courts for easy remedies, those who lose out on forays into the capital markets need to appreciate that the financial services business is just that — a large, lucrative business — not a public service. Proceed with caution. IE



Julia Dublin is a corporate and securities lawyer with Aylesworth LLP in Toronto.